The Croatian, Slovenian, Serbian, Montenegrin and Bosnian economies are embroiled in a systemically significant crisis linked to the Agrokor conglomerate.

The Agrokor Group is a food and retail giant that in 2015 had a €6,5bn turnover. That is 16% of Croatia’s GDP.

The crisis

Founded during Yugoslavia in 1976, it started out a small business in Croatia to become a post-Yugoslav giant. Through a frenzy of mergers and acquisitions in the 1990s and 2000s, the company sells anything from cooking oil to ice cream and has the biggest network of retail stores in Southeastern Europe. It is now struggling to remain afloat.

Much of the acquisitions frenzy was financed by issuing debt. By September 2016, Agrokor owed €3.5bn towards creditors and €2.2bn towards suppliers, totaling six times its equity, the Financial Times reports.  It is now drained off liquidity and unable to meet payments.

Since January 2017, rating agencies have downgraded the company’s credit profile, the value of its bonds is junk, and suppliers have stopped delivering. In March, Standard and Poor’s has rated the company with CC, one notch above Selective Default. Debt maturities are not due before September 2018, but the company is unable to meet coupons on bonds that are imminent: May 1st and August 1st. A missed interest payment means default.

Without working capital, the company can’t work. The company has 40,000 employees in Croatia, 20,000 in Serbia and Bosnia, and over 70,000 in Slovenia. That makes it in every respect a Yugoslav crisis.

Corporate crisis-management

On Wednesday, April 19, Agrokor’s suppliers and creditors reached an agreement to freeze payment obligations towards lenders, including Sberbank, VTB (Russia), Erste Group, Raiffeisenbank (Austria), UniCredit, Intesa Sanpaolo (Italy), and bondholders T Row Price and Axa. Meanwhile, a consultancy should take over management, with McKinsey, BCG, Ronald Berger, and Alix Partners appearing to be among the candidates to lead the restructuring process.

The restructuring will take quite a bit of legal “structuring,” according to Croatian media. Consultants will need to unpack how a series of assets were used as collateral for more than one loans, while regulators looked the other way. And all this needs to be done with caution due to the company’s centrality in the Croatian economy, not to mention the Slovene through Akrokor’s Mercator subsidiary.

For the moment, what has been agreed is a suspension of obligations, but the group is pressed for fresh capital to keep the business moving. In essence, the primary negotiator is the Croatian government.

Political crisis-management

The crisis is moving into the hands of the Croatian state. The company’s 95% shareholder, the oligarch Ivica Todoric, has signed off the management of the crisis to the Croatian government. On April 13, the Croatian government introduced the so-called “Lex Agrokor,” which makes the government the main negotiator with suppliers and creditors.

The assumption is that taxpayers money will be making its way to meet the company’s obligations sooner or later. The question is how much and under what conditions.

Last week, Slovenia followed with a similar law, looking after the interests of Mercator, that is, Agrokor’s biggest subsidiary. The subsidiary is for the moment working smoothly, but Ljubljana has every reason to fear it could be “raided” by the owner for cash and loan guarantees.

Meanwhile, also on Wednesday, Serbia’s Minister of Trade is hosting a conference between all Yugoslav successor states embroiled in the Agrokor affair, without Croatia’s participation. Serbia’s trade ministers, Rasim Lajic, aims for a solid front in a restructuring process that will no doubt mean shedding jobs and closing down ailing parts of the conglomerate. In this process, prioritizing losses will no doubt have some political implications.